Date: August 16, 2018
Powell to Keep Hiking as U.S. Growth Trumps Turkish Turmoil
That’s the message seasoned watchers of the Federal Reserve have for any investors hoping that turmoil in Turkey and the wider emerging-market selloff would stay the hand of Chairman Jerome Powell from raising interest rates. While international developments did cause the U.S. central bank to hold back in 2015 and 2016, there are big differences between now and then. U.S. unemployment was higher and underlying inflation was lower. But perhaps more importantly, the nexus of the turbulence was China, whose economy is the world’s second largest and more than 10 times the size of Turkey’s. “The broad conclusion from history is that the U.S. can generally ignore what happens in emerging markets, unless it involves China,” said Michael Gapen, chief U.S. economist at Barclays Plc and a former section head at the Fed Board in Washington. Investors agree with that assessment. Despite fears of Turkish contagion, odds of a Fed hike in September were unchanged from a week ago at 90 percent, according to pricing in federal funds futures, with the probability of another move in December seen at roughly 55 percent. Fed officials will “be concerned, they’ll be worried and they’ll be monitoring, but they’re not going to take any action on U.S. monetary policy until they expect that crisis to spill over in some substantive way into the U.S.,” said Robert Martin, U.S. economist at UBS Group AG who formerly ran an international capital markets section at the Fed. So far, the fallout has been limited. While U.S. stock markets have wobbled in recent days in response to the turbulence in Turkey, they’re still near all-time highs. The emerging-market jitters have pushed up the dollar, which on the margin could crimp U.S. economic growth by making it more expensive for companies to export. But that potential drag has been partly offset by a fall in long-term interest rates. “If you look at how Turkey is affecting U.S. financial conditions, at the moment you barely see it,” said Roberto Perli, a partner at Cornerstone Macro and a former Fed Board economist.
U.K. Retail Sales Rebound in July on Warm Weather, Discounts
U.K. retail sales bounced back strongly in July as warmer weather and extended discounts at stores encouraged shoppers to open their wallets. Sales gained 0.7 percent from June, compared with a median estimate of a 0.2 percent gain in a Bloomberg survey. The increase was led by online sales, food and clothing, according to data from the Office for National Statistics in London. Excluding auto fuel, sales jumped 0.9 percent. Britons enjoyed a heat wave this summer that lifted spending, while the soccer World Cup helped boost sales of food and drink. Still, the warm weather may have kept people away from some high-street stores as online spending climbed to a record proportion of total. The pound climbed after the data and was 0.2 percent higher at $1.2730 as of 9:34 a.m. in London. The Bank of England raised interest rates this month to the highest level in almost a decade on concern that domestic price pressures are building. A report yesterday showed the inflation rate climbed to 2.5 percent, above the central bank’s 2 percent target. Still, the depreciation of the pound triggered by Brexit and meager wage growth so far have made it harder for consumers. The country is only just emerging from a year in which price gains outstripped wage growth. That’s been brutal for U.K. retailers. Department store House of Fraser needed a rescue package this month to avoid insolvency. Home improvement chain Homebase said it will close more than 40 stores in Britain and Ireland. In the past year, the sector has seen BHS, Maplin Electronics and the U.K. arm of Toys “R” Us Inc fall victim to the squeeze. Traditional bricks-and-mortar stores are struggling in the face of competition from the internet. Spending online jumped to a record 18.2 percent of all retailing in July, the same level as in department stores, while summer discounts lasted longer than usual this year both online and in stores, the ONS said. Over three months, sales gained 2.1 percent from the previous period, the ONS said. From a year ago, retail sales increased 3.5 percent in July. Excluding fuel, annual growth was 3.7 percent.
China and U.S. to Resume Low-Level Talks in Bid to Resolve Trade War
China will dispatch Vice Commerce Minister Wang Shouwen to the U.S. for low-level trade talks in late August, the first official exchanges since earlier negotiations broke down two months ago.The Chinese delegation led by Wang will meet with an American group led by David Malpass, under-secretary for international affairs at the Department of the Treasury, at the invitation of the U.S., China’s Ministry of Commerce said in a statement on its website on Thursday. The news buoyed risk sentiment in Asian trading, with futures on the S&P 500 Index rallying as much as 0.4 percent. The offshore yuan gained against the dollar for the first time in seven days. “This will be ‘talks about trade talks,’” said Gai Xinzhe, an analyst at the Bank of China’s Institute of International Finance in Beijing. “Lower-level officials will meet and haggle and see if there is a possibility for higher-level talks.”While the talks are at a relatively low level for now, the market reaction clearly shows that people and investors in Asia are hopeful for successful negotiations. Before the deal collapsed in May, China agreed to “significantly” increase purchases of U.S. goods and services, and that may provide a guide for the next round of discussions. To restart trade negotiations with the U.S., China must offer a package of measures, according to Jacob Parker, the vice president for China operations for the U.S.-China Business Council in Beijing. China needs to make an offer that slashes the bilateral trade surplus, lowers import tariffs, provides better protection for intellectual property and stops forced technology transfers, Parker said earlier this month. Caution is warranted, according to Gai. “Even if the senior officials reach a deal, things could still change, as President Trump can easily flip-flop. We have been there.” China’s equity market has suffered declines and the yuan has been on a losing streak for more than a month. Chinese authorities, bracing for economic fallout, have introduced measures to support growth ranging from shifting toward a more accommodative monetary policy to boosting fiscal spending.